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SEPTEMBER 2012 - VOL. 28 NO. 9
(Continued on page 2.)
by Gary L. Hunt, July 25, 2012
The energy business cycle has always been
dominated by boom and bust cycles. Through
changes in technology, economic conditions
and regulation, nothing has altered that
cyclical pattern. We have, however, seen
driving forces of change affect the energy
business cycle both for the good and not
so good.
The Big Shift in energy today is not
what you think. It is not going to be driven
or dominated by political correctness or
government industrial policy. The big shift in
energy is not pro-coal. It is not pro-renewable
energy. It is pro-business and a competitive,
sustainable business bottom line.
The recovery from this recession may be slow
and feeble but it is coming. And when it roars
to life there will be no stopping the pent up
economic energy, demand and willpower
it brings.
Electric power has traditionally tracked
the rise and fall of GDP. And so it will in
this business cycle as well. But that does
not mean that the energy industry is not
also continuously adapting to change and
reinventing itself for the business stages ahead.
The boom and bust cycle is not new but
the factors driving it are changing it radically
from our recent history:
 From Falling to Rising Marginal Cost of
Power Generation. For the long period of
post World War II growth across America,
improvements in technology and other
factors led to declining marginal cost
of production. That is each new baseload
coal fired generator added to the power
generation fleet reduced the marginal cost
of electricity because these power plants
operated more efficiently at lower cost.
Early enthusiasm for nuclear energy was
based upon the belief that it would continue
to add low cost electricity supply to power
America’s economic growth. But it didn’t
work out that way with high inflation,
The Big Shift In Energy Is Not What You Think
constantly changing regulatory requirements,
construction delays, and growing public
opposition after Three Mile Island. The result
was that first generation of U.S. nuclear power
plants cost orders of a magnitude more than
expected and stopped future nuclear energy
expansion in its tracks to this day. It also
shifted the marginal cost of energy higher.
Rising marginal cost of energy creates
powerful incentives for efficiency and
technology change. Low natural gas prices
offer a safe haven from rising marginal costs.
 From the Fuel Use Act to the Growth of
Unconventional Gas. There was a time when
America thought it would run out of natural
gas. Conventional supplies in sufficient
volume difficult to find with the technology
available and the depletion rates were a
steep slope. The Fuel Use Act prohibited the
burning of natural gas for power generation in
the Jimmy Carter era to save the gas for home
heating purposes. As little as five years ago,
the conventional wisdom was that the U.S.
would soon become a net importer of natural
gas in the form of LNG securing from the
same volatility and unfriendly places that
provide imported oil. Technology in the form
of horizontal drilling and hydraulic fracturing
combined with the ingenuity and persistency
of wildcatters like Mitchell Energy and others
used the disruptive potential of these new
technologies to turn this natural gas situation
completely on its head. By 2011 America is
exporting excess natural gas, gas prices have
fallen to historic low levels on the oversupply
and been decoupled from oil prices. Low
priced natural gas is America’s global
strategic competitive weapon of choice.
 From Renewable Energy for Fuel Diversity
to Clean Energy and Back. As marginal
costs rose, concerns were raised about putting
too many of our eggs in one fuel basket. Too
much coal, too much nuclear energy and then
later too much natural gas. The Clean Air Act
and other environmental legislation raised our
consciousness about smog and greenhouse
gas emissions that caused acid rain conditions
in New England from Midwest coal
plants. The adoption of the foundational
environmental legislation of the Clean Air
Act and the Clean Water Act created a market
for clean energy resources from wind and
solar. The technologies were new, untested
and costly. Renewable Portfolio Standards
were designed to create a slice of system
place in the power supply mix for these new
technologies in hope that their marginal cost
would fall as the installed capacity increased
much as it did with coal and natural gas
generation previously. Today, more than
thirty years later the marginal cost of wind
and solar are falling due mostly to oversupply
of wind turbine and PV panel production in
Energy Business
Cycle

SEPTEMBER 2012 - VOL. 28 NO. 9
(Continued on page 2.)
by Gary L. Hunt, July 25, 2012
The energy business cycle has always been
dominated by boom and bust cycles. Through
changes in technology, economic conditions
and regulation, nothing has altered that
cyclical pattern. We have, however, seen
driving forces of change affect the energy
business cycle both for the good and not
so good.
The Big Shift in energy today is not
what you think. It is not going to be driven
or dominated by political correctness or
government industrial policy. The big shift in
energy is not pro-coal. It is not pro-renewable
energy. It is pro-business and a competitive,
sustainable business bottom line.
The recovery from this recession may be slow
and feeble but it is coming. And when it roars
to life there will be no stopping the pent up
economic energy, demand and willpower
it brings.
Electric power has traditionally tracked
the rise and fall of GDP. And so it will in
this business cycle as well. But that does
not mean that the energy industry is not
also continuously adapting to change and
reinventing itself for the business stages ahead.
The boom and bust cycle is not new but
the factors driving it are changing it radically
from our recent history:
 From Falling to Rising Marginal Cost of
Power Generation. For the long period of
post World War II growth across America,
improvements in technology and other
factors led to declining marginal cost
of production. That is each new baseload
coal fired generator added to the power
generation fleet reduced the marginal cost
of electricity because these power plants
operated more efficiently at lower cost.
Early enthusiasm for nuclear energy was
based upon the belief that it would continue
to add low cost electricity supply to power
America’s economic growth. But it didn’t
work out that way with high inflation,
The Big Shift In Energy Is Not What You Think
constantly changing regulatory requirements,
construction delays, and growing public
opposition after Three Mile Island. The result
was that first generation of U.S. nuclear power
plants cost orders of a magnitude more than
expected and stopped future nuclear energy
expansion in its tracks to this day. It also
shifted the marginal cost of energy higher.
Rising marginal cost of energy creates
powerful incentives for efficiency and
technology change. Low natural gas prices
offer a safe haven from rising marginal costs.
 From the Fuel Use Act to the Growth of
Unconventional Gas. There was a time when
America thought it would run out of natural
gas. Conventional supplies in sufficient
volume difficult to find with the technology
available and the depletion rates were a
steep slope. The Fuel Use Act prohibited the
burning of natural gas for power generation in
the Jimmy Carter era to save the gas for home
heating purposes. As little as five years ago,
the conventional wisdom was that the U.S.
would soon become a net importer of natural
gas in the form of LNG securing from the
same volatility and unfriendly places that
provide imported oil. Technology in the form
of horizontal drilling and hydraulic fracturing
combined with the ingenuity and persistency
of wildcatters like Mitchell Energy and others
used the disruptive potential of these new
technologies to turn this natural gas situation
completely on its head. By 2011 America is
exporting excess natural gas, gas prices have
fallen to historic low levels on the oversupply
and been decoupled from oil prices. Low
priced natural gas is America’s global
strategic competitive weapon of choice.
 From Renewable Energy for Fuel Diversity
to Clean Energy and Back. As marginal
costs rose, concerns were raised about putting
too many of our eggs in one fuel basket. Too
much coal, too much nuclear energy and then
later too much natural gas. The Clean Air Act
and other environmental legislation raised our
consciousness about smog and greenhouse
gas emissions that caused acid rain conditions
in New England from Midwest coal
plants. The adoption of the foundational
environmental legislation of the Clean Air
Act and the Clean Water Act created a market
for clean energy resources from wind and
solar. The technologies were new, untested
and costly. Renewable Portfolio Standards
were designed to create a slice of system
place in the power supply mix for these new
technologies in hope that their marginal cost
would fall as the installed capacity increased
much as it did with coal and natural gas
generation previously. Today, more than
thirty years later the marginal cost of wind
and solar are falling due mostly to oversupply
of wind turbine and PV panel production in
Energy Business
Cycle